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On robust asymmetric equilibria in asymmetric R&D-driven growth economies

  • Paolo Giordani

    ()

  • Luca Zamparelli

    ()

In an R&D-driven growth model with asymmetric fundamentals the steady state equilibrium R&D investments are industry-specific and they are such that R&D returns are equalized across industries. Return equalization, however, makes investors indifferent as to where to target research and, hence, the problem of allocation of R&D investments across industries is indeterminate. Agents' indifference creates an ambiguous investment scenario. We assume that agents hold "ambiguous" beliefs on the per-industry profitability of their R&D investments. Investors' aversion towards ambiguity (in the sense of Gilboa-Schmeidler, 1989) eliminates the indeterminacy of the R&D investment problem. In particular, we prove that the asymmetric return-equalizing equilibrium is robust against a however small degree of investors' aversion to ambiguity.

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File URL: http://hdl.handle.net/10.1007/s10203-010-0109-4
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Article provided by Springer in its journal Decisions in Economics and Finance.

Volume (Year): 34 (2011)
Issue (Month): 1 (May)
Pages: 67-84

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Handle: RePEc:spr:decfin:v:34:y:2011:i:1:p:67-84
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